Government draft of the Fund Location Act („Fondsstandortgesetz“) passed – Impact on investment law

On 20 January 2021, the Federal Government adopted the draft of the Fund Location Act ("FoG") (0051-21.pdf (bundestag.de).

In terms of legal policy, the new regulations are intended to achieve the balancing act of making Germany more competitive as a financial centre without at the same time lowering the existing level of protection for investors. The key points of the government draft for the FoG concern supervisory law:

• Pre-marketing will be comprehensively re-regulated in the German Investment Code (KAGB). As a result, the readjustment of sales and pre-marketing does not exclude reverse solicitation.
• The product range of investment funds permitted under the KAGB will be significantly expanded.
• Regulations on the revocation of cross-border distribution of investment funds are newly implemented in the KAGB in implementation of the directive on cross-border fund distribution.
• Keyword Sustainable Finance: The KAGB, the Securities Trading Act (WpHG) and the Insurance Supervision Act (VAG) will be adapted to the Disclosure Regulation and the Taxonomy Regulation in order to make it possible to take greater account of sustainability aspects in investment decisions.
• The prerequisites for further digitalisation of supervision will be created. For example, in section 306a KAGB, the requirements for the distribution of investment funds to private investors are supplemented to enable purely digital distribution and for digitalisation in investor qualification in section 1 (19) no. 33 KAGB.

Regulatory Law – Adjustments to the KAGB

On the regulatory background: On 12 July 2009, Directive (EU) 2019/1160 amending the UCITS Directive 2009/65/EC (UCITS II) and the AIFM Directive (2011/61/EU) (AIFMD II) and Regulation EU 2019/1156 were published in the Official Journal of the EU. The amendment of these directives includes, in particular, an EU-wide uniform concept of pre-marketing for the first time. The member states are obliged to transpose the amended directives into national law by 2 August 2021, and the associated regulation is directly applicable from this date.

Pre-Marketing Regulation

For the coverage of pre-marketing, a legal definition was introduced in § 1 para. 19 no. 29a KAGB. According to this definition, pre-marketing shall directly originate from the AIF management company (AIFM) or on its behalf, thus group companies of the AIFM would also be classified as third parties whose involvement in marketing is only permissible under the restrictions provided for pre-marketing. The concept of pre-marketing covers both professional and semi-professional investors within the meaning of the KAGB who are domiciled in the EU or the EEA. As under the current legal situation, an initiative to acquire units of a fund that originates from the potential investor (so-called reverse solicitation) does not constitute distribution and now also does not constitute pre-marketing.

So far, for an AIF management company it only mattered whether an activity was a distribution according to section 293 KAGB or not - the latter in particular if a process preceding the acquisition took place. With pre-marketing, a new, third (intermediate) level is introduced, which subjects activities in the run-up to the actual distribution activity to a regulatory corset.

It is helpful in this respect that the new regulation contains concrete criteria for the quite difficult demarcation at which point the threshold to sales is crossed. This is to be affirmed with the consequence that then there is no longer mere pre-marketing,

(1) if the information provided to potential professional and semi-professional investors is sufficient to put the investors in a position to commit to the acquisition of units or shares of a specific AIF,

(2) subscription forms or comparable documents are available, whether in draft or final form; or

(3) if formation documents, information pursuant to section 307 (1) sentence 2 KAGB, prospectuses or offering documents of an AIF not yet authorised are available in final version.

As a result, it is decisive for the pre-marketing phase that at this stage the potentially interested investors are not yet provided with concrete product information or documents with the documents provided as a basis for them to make an informed investment decision on their own. Therefore, if only draft prospectuses or offering documents are provided, they must not contain any information enabling such an investment decision.

According to § 306b KAGB, investors may not subscribe to units of an AIF during pre-marketing. Finally, as a follow-up obligation, it is provided that a German AIFM must notify BaFin within two weeks after the start of pre-marketing and provide certain information. However, this notification obligation also applies to non-EU AIFM with regard to their pre-marketing in Germany.

In addition, registered capital management companies pursuant to Sections 2 (4), 44 KAGB are not likely to be covered by the restrictions and follow-up obligations of Section 306b KAGB-new, because Section 2 (4) KAGB does not refer to Section 306b KAGB-new.

Expansion of product range

The product range possible under the KAGB is expanded in various respects. In future, closed-ended special AIFs may also be set up as investment funds; section 139 KAGB. In this context, the regulations known for open-ended investment funds apply to the extent that they are also applicable to special AIFs. Rules on the redemption of units are therefore excluded, as redemption does not take place in the case of closed-end funds. Furthermore, master-feeder AIFs can in future also be issued as closed-end public products, § 272a to 272h HGB. Previously, such structures were only permitted for open-ended public funds. In addition, so-called open-ended infrastructure investment funds will be newly introduced, cf. sections 260a to 260d KAGB, which are intended to create vehicles suitable for small investors to invest in infrastructure project companies. Finally, the product range will be expanded by the fact that open-ended real estate and infrastructure special funds will also be permissible in the legal form of an open-ended investment limited partnership, in addition to the possibility of launching as a special fund; cf. section 91 (3) KAGB.

Revocation of cross-border distribution

Sections 295a, 250b KAGB introduce a uniform procedure with uniform requirements for the revocation of the cross-border marketing of certain EU AIFs and UCITS in Germany - the procedure of so-called de-registration. It is envisaged that if a UCITS or AIF management company wishes to terminate the cross-border marketing of investment assets for which a marketing notification has already been made, a specific revocation procedure must be followed. The management company must then make a lump-sum offer to repurchase or redeem all units or shares to all investors known to it for at least 30 working days, publicly available and individually, directly or via financial intermediaries of the respective offer - without costs or deductions, if applicable, related to one or more unit classes. As of the date of revocation, the management company shall then cease distribution. In addition, a prohibition of pre-marketing in relation to the revoked AIF units or AIF shares applies for a period of 36 months from the date of revocation. It should be emphasised that the management company may use all electronic or other means of remote communication for the purpose of providing information, cf. section 285b (4) KAGB.

Digitalisation

Various new regulations will advance the digitalisation of supervision. For example, the investment limits within the meaning of section 240 (2) KAGB will be abolished, and in particular the written form requirement will be replaced in numerous places of the KAGB by the text form which must now be complied with. Above all, this applies to communication with the BaFin; cf. new section 7b KAGB. However, this will not come into force until 1 April 2023. The ratio is the promotion of digital communication between all market participants - fund managers, investment companies, custodians, potential investors as well as the holders of significant investments and finally the Federal Financial Supervisory Authority. This is accompanied by the mandatory use of the electronic communication procedure provided by BaFin. In many cases, the permanent data medium for informing investors is then no longer necessary; cf. section 295b (2) KAGB.

Sustainable Finance

Following the requirements resulting from the AIFMD II and the UCITS II two, further modifications of the KAGB are planned in which adjustments to the so-called Disclosure Regulation and the Taxonomy Regulation are undertaken. In particular, an extension of the catalogue of requirements to be audited by the auditor (cf. section 38 para. 3 sentence 2 KAGB) and an integration of sustainability-related information duties in the sales prospectuses of public investment funds, cf. section 165 para. 2 no. 42 KAGB, are planned.

Investment law advice by Schalast

We are happy to advise you on all questions regarding the effects of the new Fund Location Act as well as on investment and tax law issues in general.

Your contact persons: RA Dr. Thorsten Voß and RA StB Dr. Oliver von Schweinitz, LL.M. (Duke)